We are all aware of the definition of a shareholder, which comprises equity and preference shareholders in addition to any individual who owns shares of the corporation. As you are already familiar with from reading this article’s definition, agreements between the company and one or more shareholders or between the shareholders have historically included share purchase agreements and shareholder agreements. These contracts, which outline the parties’ obligations and rights, are widely used in fundraising. To support my claim, this article will focus solely on the provisions, enforceability, and meaning of the Companies Act of 2013. It will also finish with some important points to consider.
Shareholder Agreement and Share Purchase Agreement meaning:
Shareholder agreement: The shareholder agreement has been used to define the internal management of the company and is very similar to the bye laws of the company. They have been used to avoid conflicts between the company and shareholders or one or more shareholders as the case may be and define the rights, duties, and liabilities of the company.
Share Purchase Agreement: The share purchase agreement has been entered between the buyer and seller for the sale of the shares of the company. Also, the company is not required to be a party under these agreements. The share purchase agreement defines the rights, duties, and obligations of the buyer and seller of the shares under the agreement.
Enforceability
One of the purposes of the shareholder agreement and share purchase agreement is to uphold the parties’ right to first offer in the event of a transfer of shares. Any breach of this right may be enforced by the parties, but only to the extent that the conditions do not conflict with the company’s bye laws (AoA). The shareholder agreement is not publicly accessible to stakeholders or the broader public, however, the company’s articles are available to the public through the MCA portal. The following is a discussion of a few relevant cases that shed light on the enforceability of these agreements:
i. In the case of World Phone India and HTA Ltd. and Ors., the Delhi High Court held that to enforce SHAs, an endeavor should be made to simultaneously incorporate all the changes in the AoA of the company which is made in the shareholder agreement.
ii. In the case of Bajaj Auto Ltd. v Western Maharashtra Development Corporation Ltd. Bombay High Court held that even if the terms of a private arrangement between shareholders were not permissible under the AoA of a company, it would not in any way destroy the enforceability of the agreement between the shareholders.
iii. In the case of Vodafone International Holdings BV v. Union of India The court held that the SHA is not a public document that binds parties thereof, but it will not bind the other remaining shareholders or the company which are not a party to the agreement. It provides flexibility to make provisions for solving disputes among the shareholders and is also one of the modes of future capital contributions. Hence, the court stated, in verbatim, that:
“This court (in V.B. Rangaraj) has taken the view that provisions of the Shareholders’ Agreement imposing restrictions, even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, is a view we do not subscribe. (Therefore,) the shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the AoA. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company. It can visualize the best interest of the company on diverse issues and can also find different ways not only for the best interest of the shareholders but also for the company.”
The shareholder agreement should not violate the Companies Act of 2013, the Memorandum of Associations, or any other applicable rules and regulations, aside from the previously mentioned pertinent case law. If the agreement violates any of the legislative provisions, it would be deemed null and void. Section 58 of the Companies Act, 2013 governs the transferability restrictions, which are as follows:
“Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable:
Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract”.
Note: Section 58(1) of the Companies Act, 2013 provides that the private company limited by shares refuses due to power provided under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within thirty days shall intimate the transferor and transferee about such refusal to register the shares.
Hence, the company cannot refuse to register the transfer of shares except in the case of a private company due to the conditions specified under the AoA of the Private Company. The sub-section 2 of section 58 also provides for the arrangement in respect of the transfer of the securities which shall be enforceable as a contract and it can be construed from the given proviso, that the share purchase agreement has been accepted by the section.
As per the Companies Act, 2013, the shares are the moveable property, and the transfer of the movable property is governed by the Sale of Goods Act, of 1930. The Sale of Goods Act, of 1930 also covers the share within the definition of the goods as specified therein.
Also, Section 62 of the Sale of Goods Act, 1930 provides that where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.
It means the restriction on the further sale of the shares by the buyer without giving the offer to the seller is valid as section 62 of the Sale of Goods Act, 1930 has provided for varying the right as may be provided under this Act.
Conclusion
We can therefore conclude that the share purchase agreement is lawfully valid and enforceable in India as a contract. In contrast, the shareholder agreement will only be enforceable in the case of private companies if it does not conflict with the company’s articles of association; in the case of public companies, as discussed above, it will be null and void. The Sale of Goods Act, 1930 makes the share purchase agreement enforceable. We’ve all heard of these kinds of agreements in this era of startup success, but strangely, not many of us have understood the differences between these two agreements. I think you will find it helpful that I have attempted to make clear the intent and legality of these agreements.
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